How Do You Allocate Your Capital?
The standard business-school answer to this question is that you allocate capital to the project or idea with the highest anticipated return.
If you dig a little deeper into this generic textbook answer, you will quickly find that how you allocate capital has a lot to do with how you make decisions. A project or idea will not implement itself. You have to deliberately decide to spend your time and money on a particular idea in favor of another project that yields less in return.
However, it seems challenging for small business owners to make decisions. Why? As a reason, I often hear, "I do not have time to sit down and think every decision through." Fair enough - but not every decision is equal. Some require more thought, others less.
Small Decisions Aren't Always Small
There is a fundamental difference between deciding to open a new store location in another city and to replenish sold-out inventory. I suppose you are usually quick to determine if you need to buy more supplies without much analysis. These day-to-day operational decisions are short-term and cause little harm if you don't get them entirely right.
On the other end of the spectrum are decisions that can have a long-term impact on your business. Whether you want to buy a competitor, launch a new product, or open a new store in another city, these strategic decisions are so significant that they can make or break your company. Fortunately, these decisions are usually rare because they involve a considerable commitment of your time and money - often some form of outside financing - to make them happen. These external factors can act as natural speed bumps, slowing you down and forcing you to thoroughly analyze your ideas before pitching them to investors or making the final decision.
The most concerning decisions are those that are not significant enough to be considered strategic or small enough to be operational. They are somewhere in between and prone to be treated like small, operational decisions, which we usually make on the go without much thought. Rushing these tactical decisions can create significant headaches for small business entrepreneurs in the long run. Whether you want to launch a newsletter, remodel your store, or revamp your website, you should ponder the consequences of these ideas for at least a little bit. Even if there is often not much money at stake, some of these projects require a substantial time commitment. And your time can be as valuable as your dollars.
Capital Is Not Just About Money
Unlike a decade or two ago, when even tactical decisions entailed significant financial commitments or the hiring of specialists, many ideas can now be realized by an app downloaded from the internet. If you haven't tried it, it is usually straightforward, just like plug-and-play.
Although there seems to be an abundance of apps in today's internet-dominated world, it does not mean that these applications maintain themselves or create the content for you.
In the past, writing a newsletter, for example, was a costly production requiring you to coordinate between the copywriter, designer, photographer, printer, and the postal service. Today, you send out an email blast to all of your customers at almost no cost. Sounds easy? Well, not so fast. Here are a few simple questions you should consider first:
Who will consistently provide you with engaging content for your newsletters?
Are you willing to outsource that task, or do you want to write every newsletter yourself?
Will you have time for editing your newsletter every week, rain or shine?
As you can see from this example, the decision to write a weekly newsletter is less about allocating enough money to your idea and more about allocating enough time.
Your Anticipated Return Is Not Always Monetary
Unlike in mathematical investment models, where only numbers count, small businesses often have a broader, more pragmatic view of what kind of return they expect from their time and financial commitments. That is especially true for tactical decisions, where entrepreneurs are not forced to follow the playbook of verifiable numbers favored by loan officers at banks or outside investors.
Tactical decisions do not always create a monetary return.
Instead, they are often part of a roadmap that can lead to increased brand equity or new capabilities the company can later leverage in other areas. For example, adding professional photos to an online store rarely has a direct monetary investment return - unless you can isolate the effect these pictures will have on your revenue. However, these new photos are a crucial building block to make your store appear more sophisticated and higher-end, increasing your brand equity in the long-term.
Another example relates to the software needed to email newsletters to your customers. Such a capability can also be used to deliver advertisements, product introductions, or event invitations.
Four Steps to Make Better Tactical Decisions
If you face a decision that falls out of your operational norm, acknowledge that you have a situation that requires you to choose. Don't ignore or defer it. Problems rarely disappear on their own. If left unattended, they can become bigger over time, potentially slowing your company's growth or causing you to lose customers and revenue to a competitor.
Write down all options you have. Don't forget to include the option of keeping the status quo and not changing anything ("the do-nothing option").
Create criteria against which you evaluate each option. Your criteria may include an amount of money you would need to set aside to implement your idea. However, they should also cover your time commitment and how your idea can benefit your company. Benefits can include non-monetary items that do not have an immediate return, such as new capabilities, improved brand equity, or a better competitive position.
Take an hour or two, sit down, and evaluate your options against the criteria you established in the third step. Should you feel overwhelmed or not knowledgeable enough to come to a decision, ask an expert in that field for advice. They can usually show you the bigger picture and help with the evaluation. Don't rush your decision but don't hesitate either. Pushing your decision off into the future without a good reason is rarely a sound business approach because it can delay much-needed improvements and weaken your competitive position.
Don’t Push Off Your Decisions
You make decisions about how you spend your time and money daily. Do you spend it on a new subscription service a friend told you about or on a cool social media ad you are pondering for awhile?
Although it is often very tempting to push off these kinds of decisions to another less busy day, try to resist it.
Instead, use these four steps to structure your thinking, make your choice, and move on.
Running through these four steps in your mind will become easier and faster with every decision you make - and the allocation of your capital to your high-return areas will become steadier and more deliberate.
